chapter  4
13 Pages

1 The Financial Markets of Bahrain

As seen in Chapter 1, Bahrain played in important role in the early stages of the region’s financial development, primarily through its offshore banking units (OBUs), which acted as a hub for negotiating and syndicating large financial facilities for industrial projects across the region. However, the nature of the region’s financial markets changed dramatically between the mid-1970s, when OBUs were first established, and the early part of the 21st century. Toward the middle and late 1990s, with improved communication and more efficient air links between regional hubs in the UAE, Kuwait, Saudi Arabia and the rest of the world, London, which was already the global leader in large-scale syndication, took on the role Bahrain’s OBUs had held; doing so more efficiently and at a lower cost. Similarly, the Kingdom of Bahrain’s role as a hub for foreign exchange trading dissipated as technology reduced the need for physical trading across time zones. Bahrain’s ‘suitcase bankers,’ who had serviced the commercial needs of Saudi Arabian businesses, were also no longer necessary as local Saudi Arabian banks increasingly offered first-rate, sophisticated instruments. This evolution rendered the notion of OBUs effectively obsolete, undercutting the role Bahrain had thought it would fill in the region’s financial evolution. Since then, Bahrain has found limited success in establishing a new niche for itself, and its dwarfed role in regional finance has become a testament to this. Further dimming Bahrain’s prospects, the small island nation, barely the size of New York City, has limited hydrocarbon wealth and has failed to realize the financial sector growth that it once foresaw. Consequently, Bahrain’s most valuable asset is not economic in nature. Instead, underpinning the survival of the Bahraini economy in many ways is its geographic proximity and strong political ties to Saudi Arabia.